Try productivity, not budget trickery

Treasurer Wayne Swan’s promised budget surplus is based on the economy growing faster than most independent forecasters predict. Now yesterday’s Consumer Price Index shows that inflation is not as subdued as analysts thought, in part because of the carbon tax and the rising cost of private health insurance.

Mr Swan needs the Reserve Bank of Australia to keep cutting interest rates to keep the economy ticking along, particularly when the resources development boom peaks and turns down by this time next year. But this will only happen if the RBA is ­confident that inflation pressures are under control.

The problem is that the impact of Labor’s controversial carbon tax and private health insurance changes introduced in this week’s budget review add to the economy’s already excessive cost base. A Booz & Company analysis reported in today’s The Australian Financial Review warns that Australia faces an “unhappy legacy" of the mining boom as declining commodity prices expose a resources sector plagued by high costs and low productivity. To get inflation down, as the RBA has consistently pointed out, productivity needs to pick up. Productivity swings around with the economic cycle, but the Rudd-Gillard governments have done little to encourage it, and instead have re­regulated the labour market. This week’s Mid-Year Economic and Fiscal Outlook has also imposed a heavier tax slug on business that Woolworths and others say will push up their costs.

Managing the ups and downs of the mining boom has been easier this time because of previous structural reforms to the labour market and especially the floating of the dollar. But Labor has gone backwards on this reform agenda. Mr Swan overestimated government revenue by a cumulative $34 billion over the past four years, and there is a danger this will recur as Treasury’s growth forecasts of 3 per cent for this financial year and next outpace estimates of most independent forecasters.

Analysis from consultants Macroeconomics shows that the $1.1 billion surplus in 2012-13 would turn into a deficit as high as $7.6 billion if economic growth slowed to 2.6 per cent. That’s before $10 billion of spending promises on the national dis­ability insurance scheme and Gonski education reforms are accounted for. Treasury secretary
Martin Parkinson
warns that Australia shouldn’t become complacent or undermine productivity-enhancing reforms of the past few decades. But that is ­precisely what we are getting with Mr Swan’s budget trickery.